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1. ‘Unconscionable Conduct and Good Faith in the Small Business, Leasing, and Franchising Sectors – The Way Ahead’ByProfessor Bryan HorriganReport Co-Author, Strengthening Statutory Unconscionable Conduct and the Franchising Code of Conduct, Australian Treasury, 2010Louis Waller Chair of Law, Monash Law FacultyAssociate Dean (Research), Monash Law FacultyConsultant, Allens Arthur RobinsonAuthor, Corporate Social Responsibility in the 21st Century (Edward Elgar, 2010)1

2. OverviewLead-up to the Panel’s inquiry and appointmentFocus and conduct of inquiryOutcomes of inquiryGovernment’s responseFlow-on regulatory impact and workLessons for lawyersCaveats up front2

3. Terms of ReferenceClarifying role v ‘clean slate’ review of statutory unconscionable conduct (ie unfinished business from previous governmental inquiries)Whether ‘a statement of principles concerning unconscionable conduct’ or ‘a list of examples that all parties agree constitute unconscionable conduct’ should be included in the TPAWhether Franchising Code of Conduct needs anything more to address five identified and potentially problematic franchising behaviours 3

4. Unconscionability Relates to …Various equitable (and some common law) causes of action and bases for reliefStatutory unconscionability under Trade Practices ActStatutory unconscionability under Fair Trading ActsStatutory unconscionability in financial services under ASIC ActUnconscionable financial services licensee conduct under Corporations ActUnjust contracts laws (eg some Fair Trading Acts, NSW Contracts Review Act)Related consumer credit lawsIndustry codes (eg Banking/Franchising Codes)State retail/commercial leasing laws4

5. Three Basic Forms of Statutory UnconscionabilityGeneral prohibition on unconscionable conduct by corporations:TPA s 51AA (in trade practices generally)

6. ASICA s 12CA (in financial services)

7. Corporations Act s 991A (financial services licencees)Unconscionable conduct in retail/personal/consumer contexts:TPA s 51AB

8. ASICA s 12CB

9. Consumer Credit Code / Contracts Review Act (NSW)Unconscionable conduct in big/small business contexts:TPA s 51AC

10. ASICA s 12CC

11. Some Fair Trading Acts

12. Some commercial/retail leasing Acts5

13. Unconscionability Under TPA s51AA & ASICA s12CA“A corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.”“A corporation must not, in trade or commerce, engage in conduct in relation to financial services if the conduct is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories.” 6

14. FSR Legislation & Unconscionability (s991A(1) CA)“A financial services licensee must not, in or in relation to the provision of a financial service, engage in conduct that is, in all the circumstances, unconscionable.”

15. Unconscionability Under TPA s51AB & ASICA s12CB TPA: “A corporation shall not, in trade or commerce, in connection with the supply [but not supply for purposes of re-supply or using up / transforming in trade or commerce] .. of goods or services [of a kind ordinarily acquired for personal, domestic, or household use or consumption] engage in conduct that is, in all the circumstances, unconscionable” ASICA: supply of financial services

16. Unconscionability Under TPA s51AC (cf s12CC ASIC Act)“A person/corp must not, in trade or commerce, in connection with (a) the supply .. of goods or services to a corp/person (other than a listed corporation) [for purposes of trade or commerce] or (b) the acquisition or .. goods or services from a corp/person (other than a listed corporation) [for purposes of trade or commerce], engage in conduct that is, in all the circumstances, unconscionable.” (s51AC TPA)ASICA: supply of financial services

17. Unconscionability under TPA s51AB & AC & s12CB & CC ASIC Act – indicatorsParties’ relative bargaining strengthsWhether conditions extend beyond what is reasonably necessary to protect legitimate interestsUnderstanding of the documentsAny undue influence, pressure, or unfair tactics by a party or someone acting on their behalfComparative prices and terms for availability of goods and services elsewhereSections 51AC & s12CC only:Consistent with treatment of similar parties/transactionsCompliance with any relevant industry codesUnreasonable failure to disclose (i) intended conduct which might affect the other party’s interests and (ii) risks to the other party arising from that conduct which reasonably they might not foreseeWillingness to negotiate terms and conditionsWhether parties act in good faithWhether contractual right exists to vary unilaterally a term or condition of a contract

18. Meanings & Levels of Unconscionability RegulationUnder ‘the Unwritten Law’ (4 categories as described by Paul Finn):[1] Unconscionability as the underlying concept for Equity as a whole[2] Unconscionability as an element or finding that is essential for specific equitable/other actions (egestoppel, relief against forfeiture, unconscionable dealings, unilateral mistake etc)Coercion/exploitation/advantage-taking

19. Unconscionable exercise of rights, retention of benefits etc[3] Doctrines & remedies associated with unconscionable dealings & exploitation, advantage-taking, and defective understanding:‘spousal guarantees’ rules (egYerkey v Jones, Garcia)

20. ‘special disadvantage’ rule (egAmadio)

21. Others (egBridgewater v Leahy)[4] Unconscionability as a direct ground of relief in its own right, unmediated by conventional doctrines (egLenah Game Meats v ABC)11

22. Full Fed Ct in ACCC v Samton Holdings (2002)Unconscientious exploitation of a party’s special disadvantage (egAmadio)Defective understanding, relationship of influence, and absence of independent explanation (egGarcia)Unconscionable departure from previous representation (egestoppel – Verwayen, Waltons Stores v Maher)Relief against forfeiture and penalty (egLegione v Hateley and Stern v McArthur)Rescind contracts for unilateral mistake (egTaylor v Johnson)12

23. Important High Court Instruction Affecting Statutory and Non-Statutory InterpretationFarah Constructions v Say-Dee [2007] HCA 22 at [135]: ‘Intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong. Since there is a common law of Australia rather than of each Australian jurisdiction, the same principle applies in relation to non-statutory law.’13

24. ACCC v CG Berbatis Holdings Pty Ltd [2000] FCA 1376The [tenants] suffered what might be called a ‘situational’ as distinct from a ‘constitutional’ disadvantage. That is to say it did not stem from any inherent infirmity or weakness or deficiency. It arose out of the intersection of the legal and commercial circumstances in which they found themselves. That disadvantage, not being constitutional in character, was not able to be mitigated by the fact of legal representation which they had available to them at all material times.

25. Unconscionable ConductSenate Economics Committee outcomesGovernment’s responseImplications of TPA reforms for ASIC Act and cognate state laws on statutory unconscionable conductPros and cons of legislated examplesDifferent kinds of principlesPros and cons of different kinds of principles15

26. Recommendation on Examples‘In many circumstances, statutory unconscionable conduct can be difficult for stakeholders to understand and for the courts to apply, which contributes to a lack of certainty and confidence surrounding the effect of the provisions.’‘A list of examples will not improve understanding or implementation of the provisions.’Scope for the ACCC, ASIC, and state regulators under a single national law on statutory unconscionable conduct (ie ACL) to include examples and other guidance.16

27. Recommendation on Principles‘Interpretative principles, as an aid to interpretation of the provisions, would assist the courts in interpreting the provisions, stakeholders in understanding them, and regulators in enforcing them.’‘The principles should recognise that section 51AC (and, arguably, section 51AB) of the TPA and equivalent provisions of the ASIC Act are intended to go beyond the scope of the equitable and common law doctrines of unconscionability, and are not confined by them.’17

28. Recommendation of Principles of InterpretationSections 51AB and 51AC go beyond common law and equity AND not limited by themApply to terms and progress of a contract – ie not just what happens at executionApply to systems/patterns of business behaviour – ie not just particular incidentsAmadio-like special disadvantage not needed to access the statutory provisions/remedies18

29. Other Unconscionability-Related ReformsHarmonisation of sections 51AB and 51Ac to be considered by GovernmentGiven single national ACL + increased regulatory enforcement powers, need for uniform national regulatory guidance by ACCC, ASIC, and state regulators on statutory unconscionable conduct (similar to proposals under unfair contracts regime)Nature of the regulatory guidance on unconscionable conductRegulators to bring more test cases on the interpretative principles and other reformsNon-government test case support/encouragement too (see later advocacy, pro bono, and research recommendations)19

30. Five Identified Franchising BehavioursUnilateral variation (eg via operations manual)Unforeseen capital expenditureEnd-of-term changes/arrangementsAttribution of legal costsConfidentiality agreements20

31. Getting the Right BalanceAvailability of evidence/expertiseAvailability of sample clausesConnection between identified behavioursSpectrum of cost recovery circumstancesSpectrum of regulatory options:Absolute banContingent banCompensation/consultation rightStructure for opening/closing relationshipsBenefits/limits of enhanced disclosure21

32. Other Franchising MattersAdditional ‘Plain English’ up front disclosure documentTreatment of ‘Good Faith’ACCC’s function as regulator v mediatorNeed for Cth/State governmental attention to wider issue of mechanisms for early dispute resolution interventionAttribution of legal costs to be examined more extensively within that review processGovernment and ACCC to work with franchising sector to develop better education, training, and research on franchising22

33. Research, Advocacy, and Pro Bono WorkPro bono legal work to support further research, advocacy, and test cases for small business on both statutory unconscionability and franchisingAlignment with existing government policies and processes on pro bono work by lawyers and consumer research and advocacyEvidence-based research needed to inform next review of these reforms and all other recent TPA/FCC changesAllow period of 3-5 years for current changes (including those arising from the Panel’s Report) to take effect23

34. Some Lessons for Lawyers in All Arms of the ProfessionSolutions to most major regulatory problems require more than doctrinal legal skills and knowledgeSignificance of representative bodies as stakeholders in legal regulatory reform process and assistance to them Realities and sophistication of the policy and reform development processImportance of legal submissions to public inquiries:Influencing the ‘rules of the game’ for big/small businessPractical legal expertise beyond governmental expertiseInsights into problems/traps beyond governmental expertiseMeaningful examples of clauses/practices/safeguardsConnections to CSR, pro bono, government procurement, business regulation impact, and other ‘business case’ issues for lawyers as client services providersNon-submission and post-submission complacency trapsNon-submission avenues of influenceSignificance of legal/public commentary/analysisInsights on the internal governmental processes for major reformsGap between research needs of one arm of government and what other arms of government recognise in research funding/rankings24

35. Future Regulatory Guidance, Advice, and ‘Test Case’ LitigationFlow-through impact of everything in the context of a changed regulatory landscape:Pre-report governmental decisions to reform statutory unconscionable conduct and FCCOne single national law on statutory unconscionable conductEnhanced regulatory powers (eg infringement notices)Recent ACCC/ASIC court wins and renewed impetus for test casesOngoing test cases on scope of statutory unconscionability in other contexts (eg share margin calls – Goodridge case; excessive bank charges as penalties: current litigation)Framing regulatory guidance beyond decided casesPotential harmonisation and impact of business/consumer provisions on unconscionable conductFurther judicial rationalisation of unconscionability doctrines (flagged by French J in Berbatis)Academic/judicial development of framework for statutory unconscionable conduct transcending existing non-statutory bases for reliefUnresolved legal questions for ‘test case’ advice/litigation about:Spread of unconscionability doctrines across ss51AA-51ACStatutory extensions beyond those doctrinesApplication of ‘special disadvantage’ to B2B contexts (egBell Group v Westpac and Optus v Telstra litigation)Existence, scope, and application of ‘situational’ forms of special disadvantageMeaning, scope, and application of good faith as an indicator of statutory unconscionabilityInteraction with ongoing academic/judicial disputes about the content and tests for good faith under contract law25

36. Good Faith IssuesTwin tracks in commercial matters – contract + TPAContent of good faith?Matter of implication of terms or construction through doctrine?Tests for good faith?Current judicial position on good faithRelated obligations (eg cooperation, best endeavours, not hinder etc)Relevant clauses (eg entire agreement, negation of implied terms, sole discretion, etc)Negotiating and drafting options on good faith26

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monash research seminar series 24.05.10

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monash research seminar series 24.05.10